Foreclosure Buying By Wall Street Providing Hot Air For New Housing Bubble

Hot air rises, and so are housing prices. It appears that Bernanke’s efforts to fund the housing market are beginning to gain some traction. An army of “ex-Wall Street executives” has had more than two years now to re-trench themselves, and move in, to essentially take over the foreclosure and investment property market in the US.

The Fed is providing 45 billion dollars per month in “hot air” liquidity for the housing market. Billions of these dollars are being loaned out to newly formed capital / investment entities whose goal is to buy up as many foreclosures as possible, along with any other desirable properties that may be available.

A number of industry professionals are telling me that prices are beginning to rise significantly and the inventory of available foreclosures is dwindling. This is creating a demand for housing that is resulting in a tighter supply and driving selling prices upward like a balloon. But when the hot air runs out, the balloon falls back to the ground.

These buyers are not end users. A housing market driven by investment activity could prove to be much more volatile than a housing market driven by more traditional owner occupant activity.

Some of these businesses, formed as “early” as 2011, have already gone from start-up investing operations to publicly held companies. There is no mistaking what is happening here. Wall Street sees an unprecedented opportunity to profit from the housing market once again.

The Fed wants to keep interest rates low and “create jobs” by liquefying the housing market just as they did in the early 2000’s. The banks hope that all of this activity will result in improved balance sheets via profitable loans and improving housing prices. And those who made money during the housing boom see another opportunity to profit from the housing bust and the resulting foreclosures.

Indeed one of the interesting aspects of real estate is it’s ability to generate cash flows in a variety of ways. Shelter is a high demand item, desired by virtually everyone in the world. It’s high dollar value, perhaps $9 TRILLION at this point, makes the US housing market one of the wealthiest sectors on earth, even after the housing bust.

Stock market savvy investment companies are using “Bernanke Bucks” to buy tens of thousands of foreclosures which they plan to rent or sell, while turning this cash flow into a profit bonanza via a stock IPO. There are a handful of these companies which are already public or nearly public, making much more off of the stock sale than they would as ordinary real estate investors.

Could this be the beginning of a new investment bubble? I think the answer is “yes”. Fundamentally we are talking about the power of none other than the Federal Reserve, the Wall Street banks, and investment companies created by guys with Wall Street connections. They have the ability to monetize the cash flows into the stock market. This promises to be the biggest real estate investment innovation since derivatives were invented.

This is the same methodology that gave us the original housing bubble. Wall Street has learned a lot about manipulating the housing market. And with the development of stock market oriented real estate investment companies, they are developing the ability to “manufacture” a housing recovery.

I expect you’ll hear lots of news in 2013 about how the housing market is improving, and prices are rising. As long as the Fed remains willing to keep the bucks flowing, we’re going to see more and more foreclosed properties flowing to large scale investing operations. This is a fundamental transformation in the housing market that is unprecedented.

It’s going to take a few more years for this entire scenario to unfold, but at some point, it’s safe to say that prices and ownership costs may reach unsupportable levels once again, leading to another bust. Only time will tell how big this bubble will become and how much hot air will be necessary to inflate it.
———————————————————————Donna S. Robinson is a real estate investor, author and investing coach located in Atlanta, GA. Follow her on twitter at donnaconsults, Facebook.com/RealtyBizConsulting and watch her videos on youtube. Her latest book, Basics of Real Estate Investing, is now available for Kindle on Amazon.com

Comments

its another bubble confirmed. as large as the previous one, although different participants, as the consumer is still bloody broke from the last bubble.

this time is both stock market rise and housing rise simultaneous all at once…. and they are feeding off each other like the massive bubble it is….its clearly not a normal real estate market with little liquidity, with most of the supply held by distressed borrowers and shadow inventory..

This will become a totally disaster, within some years this bubble will explode and new lows will unfold.
To be honestly, i am watching one particular market which is the south florida market.
In the end of 2011 it was still possible to get a 2000sqf property on a decent location (recently build)
for approximately $100.000, now same houses, same location but build in the 80s would already cost $200.000. In one year this doubled in the particular area. This is the beginning of a new debacle.
Contractors say they have much more work, new houses can booming in 2013.

But the nations overall economy is still weak, wages are low and people are not sure to keep their jobs on the long terms, still many of them are under water. This is gonna be massive.
They didn’t learnt anything at all, people gonna loose bags of money again.

totally agreed. The mainstream media is the last place to get any accurate info about the condition of the housing market.
There are no intentions to actually correct the problems, on either side of the aisle. Everyone is merely working to keep the game going.

Very interest hypothesis and very believable. Having been appraising for over 50 years and been through numerous micro and macro bubbles, it makes perfect sense to me. Our market is exactly as you describe with investors lapping up 55% of the foreclosures and 35% of all sales through MLS. We have a severe shortgage 0.4% of homes listed and pricing that has jumped 17% in two months. I smell a “bubble”.